He says there will not normally be an income tax or capital gains tax liability in the event of a claim.
A policy paying cash to a company will raise the value of the shares in that company, so on the death of a key person who is also a shareholder, Mr Grant points out the value of his or her estate would be increased and this needs to be considered in relation to the potential inheritance tax liability.
He says this might be a reason for holding the policy in trust and allowing the shareholders to introduce the funds into the company via their directors’ loan accounts.
Significant cash deposits within a company will affect the amount of business property relief (BPR) that the shares attract, Mr Grant notes.
If the shares aren’t bought and simply pass under the terms of a will to someone other than the wife, husband or registered civil partner of the person of the deceased, and business property relief is not fully available, Mr Grant says any inheritance tax liability may increase as a result.
Business property relief is protected due to the fact that a cross option agreement is used rather than a buy/sell agreement, Mr Grant says.
If a policy is held under a business trust and if the arrangement is wholly commercial, then Mr Grant says the policy should be outside the life assured’s estate in the event of their death.
Capital gains tax could arise following the sale of a partner’s or shareholding director’s share following the payment of a critical illness claim, he adds.
With ownership protection, Mr Smart says premiums paid by a limited company for plans written under a trust will usually be regarded as a trading expense, however, they will be taxed as income on the shareholder.
Premiums paid by a limited company under a company share buy back arrangement will not get relief but the shareholder will not be taxed, he adds. Premiums paid for partnership cover will not receive tax relief, he adds.
If a partner or shareholder pays the premiums, Mr Smart says this would be paid out of their pay after tax and would not attract tax relief. Generally, the proceeds of the plan would be paid free of tax, he adds.
With loan protection, Mr Smart says premiums would not attract tax relief and plan proceeds will generally be received free of tax as a capital receipt.
Mr Smart says advisers should also note a charge to income tax under the Pre-Owned Asset Tax legislation may arise where an own life plan is written under trust.
He says this is because the settlor of the trust is usually also included as a discretionary beneficiary of the trust. Accordingly, Mr Smart says where the plan pays out on critical illness or terminal illness and the funds continue to be held in trust, a charge to income tax could arise under POAT.